I’ve been talking to a lot of folks about why China’s internet sites aren’t monetizable.

I was first shocked to hear that a popular SNS website with 9 million users was not able to make any money on its users. Why not? Bloggers in US make money with much smaller audiences!

Several folks have told me that only the top 4-6 websites in China (usual suspects of Sina, SOHU, Baidu, etc) make money from advertising, and they mostly sell a banner on the home page by the day - no “pay for performance”. This implies the advertisers are just buying ads for branding purposes.

At first, I thought it was that the ad networks and affiliate systems were lacking. No Adsense for China. Google obviously has Adsense but maybe it was because Google’s share of the market was too small. That is true; recent research on search sites suggest Google is climbing back up in popularity but most folks “in the know” say Baidu is still far out ahead, 80% plus market share.

But then I went to Ad-tech conference in Beijing (http://www.ad-tech.com/beijing/) and found out these networks exist. However, the tools are immature relative to US, and the click fraud rates are outrageous (somewhat related: see this article on how China websites faked their Alexa data: http://www.chinatechnews.com/2006/02/09/3519-alexa-con-of-marketing-in-china/). Seems like everyone in the industry is guessing; none of the numbers are reliable. Don Schultz, Emeritus Professor of Northwestern University, told us not to look to the US for the right model of marketing; we have to forge our own way in China (although I find that he didn’t really have the answer as to how). Brian Fetherstonhaugh, Global CEO of Ogilvy, tells us the 4 P’s of marketing (Product, Price, Place, Promotion) are now replaced by 4 E’s (Experience, Exchange, Everyplace, Evangelism); http://digitalwatch.ogilvy.com.cn/en/?p=136. Sorry, I’m on a tangent but I was very impressed by Mr. Fetherstonhaugh’s presentation, especially since I just had a mojito with him the night before at midnight. Believe me, I was a bit surprised to stumble into the 9am keynote to see him on stage.

After talking to many folks, I believe head of China Redpoint David Yuan explained it best. E-commerce isn’t ready yet. Without mom & pop e-commerce sites, we don’t have paid search or affiliate ads. Latest CNIIC report on China internet usage (http://cnnic.cn/en/index/0O/index.htm) says: “In China…in shopping online, only 25.5% of Chinese Internet users do it yet it has become a universal action of Internet users in the USA”. I believe the majority of these transactions are done either on the large e-commerce sites (e.g., Dang Dang) or on a C2C site (e.g., TaoBao, eBay - now run under Eachnet name).

It’s not due to lack of payment options, although granted the players are all small: Alipay is the 8 lbs gorilla and the rest are baby chimps (including, alas, my baby “BeiBao”, PayPal China’s name). Nor is it due to poor logistics options. COD in China is very cheap with local couriers. In large cities, it may be because of the ease of buying goods offline, but there are plenty of goods difficult to find in the non-Tier 1 cities.

No, I believe it’s due to lack of trust. Chinese inherently don’t trust strangers. That’s the number one argument I heard from any native Chinese while at eBay and PayPal against both models (online marketplace, online payments). The brave 25% of Chinese internet users who have tried e-commerce are the vanguard of the most adventurous, risk-taking people in China already. And they demand to use Escrow on TaoBao and eBay, or only shop at large e-tailers.

The internet consumers do not trust the mom & pop e-commerce site will ship the good, or if they do ship it, it’ll be fake or broken or wrong. There’s also the fear that their debit PIN will be stolen (credit usage is almost non-existant). Without chargeback rights of credit cards like in the US, it’s a “buyer beware” market. Thus, if the internet consumers won’t buy from them, it doesn’t make sense for the mom & pop sites to advertise. SME’s can’t afford to advertise for branding. Therefore, only the big companies can afford to advertise. Big companies don’t just sell one item, so their ads are for branding. If they are trying to improve their brand, they only market on the trusted portals and search sites, where the majority of the users are anyway.

Frankly, the tracing of the difficulty of monetizing China internet sites with advertising back to the lack of trust isn’t such a huge insight, but believe me, I had to ask a lot of people to piece this together.

Here are two good books to provide academic terminology and case studies to back up this obvious-to-the-native-Chinese assertion that Chinese do not trust each other.

3 Responses to “China Internet Monetization”

Ker Gibbs Says:
October 29th, 2007 at 5:27 pm
Totally agree. Someone is going to make a bazillion dollars doing ecommerce in China. But not now. Internet in China is a low trust environment within a low trust environment. Internet everywhere is a little suspect, but in China? In China, people believe none of what they see and only half of what they can touch. Chinese consumers are price sensitive beyond belief, and that’s great for on-line price comparison. So eventually this is going to be big. But there are a lot of hurdles to overcome first!

Paul Denlinger Says:
October 29th, 2007 at 5:30 pm
Lack of trust is it. There are just too many liars,cheats and shysters in China for anyone to trust a stranger.
I have actually had people tell me that the more someone advertises online, the less they trust them! They are just after a big bunch of dumb marks.Instead, they rely on referrals from friends and relatives.
Add to this that there are HUGE amounts of ad money pouring into China by multinational advertisers. Can you imagine any western board saying “no” to more Chinese ad money when they read about China every day in the WSJ and Financial Times? This money usually ends up as brand advertising money (otherwise known as banner ads). Advertisers continue to up their budgets out of fear that not raising visibility will kill them. That’s why all the ad agencies are continuously talking up China all the time; it isn’t to necessarily get more Chinese yuan, it’s to scare their western clients from cutting back their ad budgets. “If you cut back now, your will cede the market to your competitors!”
They are not looking for online ad sales! Come on folks, let’s get real!
It’s a hype machine, and everyone knows it.

Stanley Wong Says:
December 15th, 2007 at 10:27 am
Interesting to hear from the trenches about Internet monetization in China. Seems to me that ads and e-commerce in China is similar to what it was on the web in the USA back in 1997. Where trust was a big barrier for folks to transact online. Back then Amazon and eBay were huge leaps of faith on whether or not folks were going to buy online.
I think another thing that is holding back e-commerce in China is, in the USA a return policy is an expected standard rather than an exception in Asia. Trust is the key here where consumers trust that if they don’t like the product they have a good chance they can return it.
I wonder how successful if someone tried to do something like Zappos where there is a no questions asked return policy. Is this disruptive?